Chapter 9 (MR & MC) Flashcards

1
Q

Marginal revenue

A
  • Additional revenue from more sales or from selling one more unit
  • marginal revenue depends on market structure (how competitive an industry is) and whether a business is a price taker or price maker
  • MR = P for Price taking business in perfect competition
  • MR < P for Price making businesses in all other market structures
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2
Q

One Price Rule

A

Products easily resold tend to have a single price in the market
- MR<P for price makers so when a price making business lowers price, it must lower price on ALL units sold, not just new sales

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3
Q

Marginal Cost

A
  • as output increases marginal cost increases for businesses operating near capacity or when businesses additional inputs cost more.
  • marginal cost is usually CONSTANT for businesses not near capacity
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4
Q

Diminishing Returns

A
  • as output increases, decreasing productivity increases marginal costs
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5
Q

Recipe for Max Profits

A
  • first looking at the quantity decision then the price decision
  • for each quantity, compare MR & MC
  • if MR > MC, total profits will increase. Stop increasing quantity when MR < MC
  • once you choose the TARGET quantity with max profits, set the HIGHEST POSSIBLE PRICE allowing you to sell the target quantity
  • the intersection of the MR curve and MC curve is the KEY to the recipe for max profits
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6
Q

Price discrimination

A

Charging different customers different prices for the same product or service

  • breaks the one-price rule and is possible only when a business can:
    1. Prevent low price buyers from reselling to high price buyers
    2. Control resentment among high price buyers

Elastic demand: lowers prices
Inelastic demand: rise prices

  • most examples of price distribution involve services which cannot easily be resold
  • price discriminating business eliminates MR and MC for each separate group, then sets prices allowing the sale of all quantities for which MR>MC
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7
Q

Price discrimination increases profits by

A
  1. Charging lower price to elastic demand group (lower willingness to pay)
  2. Charging higher price to inelastic demand group (higher willingness to pay)
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8
Q

Max Profits in Perfect Competition

A

Perfect competition with price-taking business, is an EFFICIENT market structure:
1. Businesses just earn normal profits and economic profits are 0
2. Maximum total surplus

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9
Q

Max profits in all other market structures

A

All other market structures with price-making businesses are INEFFICIENT:
1. With the same inputs, businesses reduce output and raise prices
2. Businesses earn economic profits
3. Total surplus < perfect competition because of deadweight loss from reduced output

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10
Q

Benefits to market structures with price making power and economic profits

A
  • product variety
  • economic profits finance innovations and creative destruction, improving living standards for all
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